European Central Bank meeting preview
The European Central Bank (ECB) will be delivering its latest policy updates on Thursday at 13:15 BST. It’s likely that the bank will not rush to make any major amendments at this meeting, opting to hold and wait to see how the latest data plays out. This is what markets are anticipating according to data from Reuters, showing a 99.3% chance of no hike as of Tuesday morning.
The ECB delivered a dovish hike in September, taking the deposit rate to 4%, but hinted that this would likely be the last hike for the time being. The takeaway from that meeting was that if the rate was held for a sufficient amount of time at that level, it would make a substantial contribution to the return of inflation to its 2% target. The economic data hasn’t changed much since then. In fact, inflation has continued to decline, dropping to a 12-month low of 4.5% in September, below what analysts had been expecting.
Yields have also risen across the eurozone, which has helped to tighten monetary conditions and strengthen the ECB’s position to hold and wait. The recent tensions in the Middle East have also raised concerns about the already-dampening growth prospects in the region.
But with oil prices having risen since the last meeting, and with the possibility that they remain elevated until risks in the Middle East region dissipate, we may see upward pressures on inflation going forward, which could make the ECB’s life much harder. Prior to the pandemic, most central banks would have deemed a rise in oil prices as somewhat deflationary as it reduced purchasing power and competitiveness. But in the current inflationary situation, where bringing inflation back to target has been a real concern for policymakers, we may see the ECB opting for a higher risk of recession rather than risking their credibility in controlling inflation. This could mean further rate hikes, albeit unlikely at the meeting this week.
This likely means continued hawkish commentary from President Christine Lagarde at the press conference, even if we see no hike this time around. She may opt to place greater emphasis on non-interest rate policy tools to get her point across, including the possibility of a quicker unwind to reinvestments from the Pandemic Emergency Purchase Programme (PEPP).
The fact that the previously expectations for no hike are so high at the upcoming meeting means there’s likely going to be more emphasis on the press conference than the actual meeting decision. The euro has been showing some resilience in recent weeks, rising to a 5-month high against the British pound (EUR/GBP) and breaking above its descending channel for the first time since it started back in July against the US dollar. EUR/USD is currently reversing some of the moves from yesterday as traders assess the viability of the bullish breakout, but the RSI is still holding above the mid-line, which means the pair could find further support if it holds above the descending channel (currently at 1.0605).
The ECB delivered a dovish hike in September, taking the deposit rate to 4%, but hinted that this would likely be the last hike for the time being. The takeaway from that meeting was that if the rate was held for a sufficient amount of time at that level, it would make a substantial contribution to the return of inflation to its 2% target. The economic data hasn’t changed much since then. In fact, inflation has continued to decline, dropping to a 12-month low of 4.5% in September, below what analysts had been expecting.
Yields have also risen across the eurozone, which has helped to tighten monetary conditions and strengthen the ECB’s position to hold and wait. The recent tensions in the Middle East have also raised concerns about the already-dampening growth prospects in the region.
But with oil prices having risen since the last meeting, and with the possibility that they remain elevated until risks in the Middle East region dissipate, we may see upward pressures on inflation going forward, which could make the ECB’s life much harder. Prior to the pandemic, most central banks would have deemed a rise in oil prices as somewhat deflationary as it reduced purchasing power and competitiveness. But in the current inflationary situation, where bringing inflation back to target has been a real concern for policymakers, we may see the ECB opting for a higher risk of recession rather than risking their credibility in controlling inflation. This could mean further rate hikes, albeit unlikely at the meeting this week.
This likely means continued hawkish commentary from President Christine Lagarde at the press conference, even if we see no hike this time around. She may opt to place greater emphasis on non-interest rate policy tools to get her point across, including the possibility of a quicker unwind to reinvestments from the Pandemic Emergency Purchase Programme (PEPP).
The fact that the previously expectations for no hike are so high at the upcoming meeting means there’s likely going to be more emphasis on the press conference than the actual meeting decision. The euro has been showing some resilience in recent weeks, rising to a 5-month high against the British pound (EUR/GBP) and breaking above its descending channel for the first time since it started back in July against the US dollar. EUR/USD is currently reversing some of the moves from yesterday as traders assess the viability of the bullish breakout, but the RSI is still holding above the mid-line, which means the pair could find further support if it holds above the descending channel (currently at 1.0605).
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